Saving the Planet with the World Bank's Assistance

The World Bank is in a position to have a significant impact on how the energy transition is financed, potentially eclipsing the efforts of major financial institutions like JPMorgan Chase & Co. or BlackRock Inc. to promote emissions reduction.

The World Bank and other multilateral development banks (MDBs) play a crucial role in reallocating funds from financial firms to climate-positive investments. Without these institutions, the dollars sitting on the balance sheets of financial firms may never be used to finance the kind of large-scale climate-change mitigation efforts that are necessary to prevent catastrophic global warming.

There is a theory that multilateral development banks (MDBs) can become the foundation of a new Marshall Plan for the planet. Just as Bretton Woods created the institution to help rebuild a war-ravaged Europe, MDBs could play a similar role in helping to address global challenges such as climate change, poverty, and inequality.

Asset managers, banks and insurers with more than $140 trillion in assets have promised to zero out their financed emissions by 2050, but only a small fraction of that money has been used to address the climate crisis. Getting the funding to where it's needed most—developing economies—requires overcoming several investment hurdles, including credit-rating constraints, foreign-exchange risks and the possibility of an emerging-markets debt crisis. In short, there isn't enough public money to finance the transition and private sources of capital aren't sufficiently incentivized to fill the gap.

The MDBs can play an important role in the transition to clean energy, as Larry Fink, BlackRock’s chief executive, has argued. By acting like insurers that reduce risk for private investors, the World Bank and International Monetary Fund can make it easier for private companies to invest in clean energy projects. This, in turn, can help accelerate the transition to a low-carbon economy.

The Sustainable Markets Initiative has suggested that MDBs set up a pool of funds that can provide "first loss" or "second loss" guarantees. This would reduce the risk and raise the credit rating for other buyers, thus catalyzing a significant multiple of private-sector investment and financing.

There is some risk and criticism associated with this approach. Sonia Dunlop from climate change think tank E3G has said that publicly funded institutions like the MDBs may be under pressure from Wall Street to take on less risk, but that supporting Wall Street shouldn't be their primary goal.

Nick Autiello, vice president of environmental, social and governance strategy at State Street Corp., believes that private finance is essential to delivering the energy transition in the timeframe needed to limit global warming. He acknowledges that there are valid criticisms of this approach, but believes that finding a way to get private finance involved is essential to meeting the challenge of climate change.

"Some shareholders of MBDs may wonder why it is their responsibility to de-risk private investments using public funds," Autiello said. "But that isn't the right way to look at it. History has shown us that properly targeted public and philanthropic investment can unlock huge amounts of private investment. And with the climate crisis we're facing, it is crucial that we use every resource at our disposal to solve it. This potential is what is driving the momentum for change. World leaders at the United Nations COP27 climate talks in November called for MBDs to be retooled to support climate action by mobilizing capital from private-finance investors."

French President Emmanuel Macron and Barbados Prime Minister Mia Mottley, a key proponent of development-finance reform, are planning a summit for June in Paris to focus on the environmental role of MDBs. Meanwhile, India has said MDB reform is among the priorities for its G20 presidency and the subject is expected to be discussed by world leaders at the meeting in September.

It is hoped that this type of pressure will start to produce results. And it is possible that it will.

In response to requests from the US and other shareholder countries, the World Bank has put forward a new “roadmap” that would see it boost its lending capacity to address climate change.

“MDBs have a rare opportunity to define the future of climate finance,” said E3G's Dunlop. “Compared to private banks, public banks control a relatively small amount of the money that is available for climate investments. Yet they have unmatched power to set financial trends.”